Thursday, April 02, 2009

THE FACEBOOK DILEMMA - TO CHARGE OR NOT TO CHARGE? IT'S ALL IN THE STOOL

Over the last several months there's been a lot of chatter about this, both in the media/blogosphere as well as (more importantly!) within the Facebook community. Doing a quick search on Facebook for "Facebook charging" bring back 287 group results (many of which have few, if any, members) generally related to this topic. Two early articles include one from Farhad Manjoo at Slate and Mike Masnick from TechDirt.

Since it seems to be a slow brain day, I thought I'd revisit a somewhat old topic today, instead of coming up with a new one on my own, and give my two cents (after all - that's about all my opinion is worth these days!). I will admit right off the bat that my opinion is not 100% Facebook-user centric, but rather also looks at this also from the perspective of what makes sense from a business perspective. So you won't be seeing me join any of these groups anytime soon!

I've been fortunate enough to have worked at two companies -- Playboy and American Greetings -- that have demonstrated a certain measure of success with employing a multi-revenue stream model in their online businesses -- what I would call the "three-legged revenue stool" -- Advertising (banners, buttons, video ads, etc.); Access Fees (charging users a toll of some kind to access premium content and/or services) and E-Commerce (selling tangible products).

Based in part on my time spent at these companies, and also based in part on my feeling that diversification in one's portfolio -- whether it's your online business or your 401(k) -- is a good thing, I happen to be a fan of the multi-leg stool. It goes without saying that the more legs (within reason!) a stool has, the sturdier that stool will be. Too many online businesses of late have decided to put all their eggs in the single-leg stool model (advertising) and as a result, have been unable to develop a defensible/scalable business model for themselves.

By having multiple revenue streams, a business can manage these streams like levers, and throttle them up or down depending on factors like consumer behavior & feedback, market conditions, competitive landscape and effective ROI. These streams in turn act like a natural hedge, giving the company that much more to fall back on in case one of the legs of the stool starts to get a bit wobbly.

By all accounts, Facebook, for all its immense global popularity and usage is still not a profitable business and they're yet again looking to raise a ton of additional money (somewhere in the neighborhood of $1oo million) to help keep the lights on. Clearly the current models in place for generating revenue are not paying the bills, so as with any smart business, they should be (and likely are) looking at ways to generate enough cash to get to profitability and generate a respectible return for their investors -- after all, isn't that the basic goal of most companies?

It's safe to say that with around 200 million users worldwide and the distinction of being one of, if not the largest photo storage/sharing site on the Web, Facebook has evolved beyond simply a social network and into a social utility -- one that provides value to most, if not all, of its users. So why a valuable utility not charge its customers for some portion of its service? The questions then become -- what to charge for and how much? In terms of what to charge for, it could be anywhere from a flat fee for initial access to an advertising-free Facebook environment to tiered charges based on usage (consumer vs. commercial accounts, # of photos uploaded, # of friends in your friends list AKA address book, etc.).

For example, let's assume that Facebook charged a flat fee of $1 per month for consumer access to the service, and assuming that the majority of users (let's say 75% for the sake of argument) agreed to pay the toll, that would be a nice chunk of change for Facebook - $150 million dollars PER MONTH give or take. Of course nobody can predict what percentage of users would actually stop using Facebook and what effect an access fee ecosystem would have on new user sign ups, but if you're like me you wouldn't think twice about paying 12 bucks a year to service one of the most valuable social utilities ever invented. After all, we happily pay for other valuable services -- my roster includes the gym, Netflix, Flickr Pro -- that cost as much if not way more -- so why not Facebook?